Legislature(2009 - 2010)
04/16/2010 10:47 AM House FIN
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 309(FIN)
"An Act amending and extending the exploration and
development incentive tax credit under the Alaska Net
Income Tax Act for operators and working interest
owners directly engaged in the exploration for and
development of gas from a lease or property in the
state; relating to interest on certain underpayments
or overpayments of the oil and gas production tax;
providing a credit against the tax on the production
of oil and gas for drilling certain exploration wells
in the Cook Inlet sedimentary basin; relating to the
use of the oil and gas tax credit fund to purchase
certain tax credit certificates; providing for an
effective date by amending the effective date for sec.
2, ch. 61, SLA 2003; and providing for an effective
date."
9:55:24 PM
Senator Lesil McGuire stated that the bill had been vetted
in multiple committees in both bodies. The Cook Inlet
region had been facing shortages of gas, the main
electrification method in the area for the last 40 years.
The gas was affordable because it was a bi-product of oil
drilling in the region. She cited a Petro technical
Resources of Alaska report which revealed that 187 oil
wells would need to be drilled between now and 2020; in
order to maintain supply and demand, and to avoid importing
the product from Indonesia. She stated that due to a
provision put into place in 2003, under title 43 of the tax
code, the Gas Exploration and Development tax credit could
be used to incentivize companies. The tax credit applied to
all areas outside of the North Slope Borough. The bill
would allow for a qualified credit against corporate income
taxes for up to 25 percent of the corporations
expenditures, specifically in Cook Inlet exploration. She
stated that the Senate Finance Committee had agreed to
allow for the credit to be taken against 75 percent of the
tax liability for qualified expenditures. The bill would
also allow credits to be applied against exploration
efforts in existing known reservoirs. The bill included a
sunset extension, which had been moved back from 2017 to
2016 by the Senate Finance Committee. The original
statutory frame work for the gas exploration and
development tax credit would have expired in 2013. The
second part of the bill allowed for three different
corporations to drill in the Cook Inlet area at different
percentages. Changes had been incorporated in the
production tax system with respect to ACES. Producers had
recommended the reduction of progressivity from .4 to .2.
The department would be allowed to waive interest on the
underpayment of taxes due to a retroactive regulation
change. The agreed upon rate was roughly 11 percent. The
bill would permit small explorers to sell their credits
back to the state without making an investment equivalent
to the credits within 24 months. The change would have no
effect on the treasury, but would help ensure that the
benefits of the credits were going to small explorers.
10:02:35 PM
Senator McGuire stressed that the intent of the legislation
was to stimulate activity in Cook Inlet and the areas south
of 68 degrees, and to make modifications in the ACES
structure. She thought that the current system hindered
development. For example, this year marked the first time
in 49 years that Conoco Phillips had not drilled an oil
well in the state.
10:04:46 PM
Mr. Powlowski referred to the sectional analysis:
Section 1 amends AS 43.20.043 (a) by increasing the gas
exploration and development tax credit to 25% on
qualifies capital expenditures and annual costs
from 10% for investments made after December 31,
2009.
Section 1 changed the gas exploration and development tax
credit under AS 43.20. The change was for corporate income
taxes and not the production tax. Page 2, Line 16 and Line
18 illustrated the change in the taxed percentage.
Co-Chair Hawker requested confirmation that the language of
the bill had previously vetted in committee in HB 229.
Mr. Powlowski continued to Section 2:
Section 2 amends AS 43.20.043 (b) to conform to the changes
made in section 1.
Section 2 was similarly from HB 229.
Section 3 amends AS 43.20.043 (c) to replace the 50% cap on
the application of the gas exploration and
development tax credit against the Alaska Net
Income Tax with a cap of 75%.
Section 4 amends AS 43.20.043 (e) to ensure that the value
of a credit under AS 43.20.043 is passed through
to consumers in a rate base submitted to a
regulatory agency.
Section 5 amends AS 43.20.043 (g) to clarify that if a
taxpayer elects to take a credit under AS
43.20.043 the taxpayer may not also claim a tax
credit or royalty modification under other
identified sections of Alaska law.
Mr. Powlowski explained that Section 3, Page 3, included
similar language from 229, but with the change to the
percentage of taxpayer liability. Section 4 was an
amendment to HB 229, and was meant to ensure that the
benefits of a credit flow to the consumer. Section 5, Page
4, Lines 8- 16, clarified that if corporations elected to
take the 25 percent corporate income tax credit, the
taxpayer would forgo the right to take other credits.
10:08:17 PM
Co-Chair Hawker clarified that the provision had been
rewritten for the sake of lucidity. Mr. Powlowski replied
in the affirmative.
Mr. Powlowski continued with the sectional analysis:
Section 6 amends AS 43.20.043 (i)(1) to allow a taxpayer to
claim a credit under AS 43.20.043 for development
in an existing field and for an expenditure that
does not lead to production. Section 6 also
clarifies that topping plants, treatment or
liquefied natural gas and other manufacturing
plants are not qualified expenditures.
Section 7 amends AS 43.20.043 to clarify that a credit
under AS 43.20.043 may be taken in the year in
which the expenditure is made or cost is accrued,
or in the following tax year.
Section 8 amends AS 43.55.020 by adding a new subsection
that allows the department to waive interest on
the underpayment or overpayment of a tax
liability if the underpayment or overpayment was
due to a retroactive regulation change.
Section 9 amends AS 43.55.025 (a) to create a special
tiered exploration tax credit of 80, 90 or 100
percent of total exploration expenditures.
Section 10 amends AS 43.55.025 by adding a new
subsection (m) to clarify that the special credit
established in section 10 is for the first three
unaffiliated wells drilled into the pre-Tertiary
strata in Cook Inlet using a jack-up drill rig.
Also caps credits; lesser of 100% credit or $25
million, lesser of 90% credit or $22.5 million;
lesser of 80% credit or $20.0 million. Only one
credit per person may not include cost to
construct or manufacture a jack-up rig and must
be for work performed after June 30, 2010. If
exploration results in sustained production of
oil or gas, 50 percent of credit received shall
be repaid. Taxpayer obtaining credit in this
section may not claim credit under AS 43.55.023
or another provision in this section for the same
exploration expenditure. Provides definitions
for "jack-up rig", "reservoir" and "sustained
production".
Mr. Powlowski stated that Page 4, Section 6, included
language from HB 229, redefining property as it related to
the qualified capital investment. The bill allowed for a
credit for fields where there had already been discovery of
gas, as the most readily available areas that gas would be
found was in established gas fields. Page 5 reflected a
change made by the committee in HB 229, removing topping
plants, liquefied natural gas, or manufacturing plants from
the list of qualifying facilities. Section 7 contained
timing language regulating when a taxpayer could elect to
take the credits. Section 8 marked the division of work
that was done in HB 229 and the governor's initiatives.
Page 5, Line 23 through Page 6, Line 20, was related to the
under or overpayment of taxes due to retroactive regulation
change and the interest rate applied to the payment.
Section 9 marked another diversion, and was originally
written into SB 290, establishing a new tiered credit
system within the exploration incentive credit of 80, 90,
or 100 percent, or the lesser amount described in Section
10. Section 10, Page 7, Line 7, established that the first
3 unaffiliated persons that drill an off-shore exploration
well for the purpose of discovering oil and gas in Cook
Inlet, that penetrates at least 3,000 feet below the
Tertiary strata, would receive special credits. If the
exploration leads to a discovery, the value of 50 percent
of the credit would be repaid to the state.
Mr. Powlowski cited the sectional analysis:
Section 11 amends the uncodified law related to the
carry forward of credits accrued under AS
43.20.043 beyond the sunset date of the credit.
Section 12 repeals AS 43.55.028 (e) (2) and (e) (3)
which requires a small producer accessing the oil
and gas tax credit fund to make additional
expenditures within 24 months of claiming the
credit.
Section 13 amends the uncodified law of the state of
Alaska to add transition language for the changes
made in section 8.
Section 14 amends the uncodified law of the state of
Alaska to make section 8 retroactive to January
1, 2006.
Section 15 amends the uncodified law of the state of
Alaska to conform the retroactive application of
regulations under section 8 to other retroactive
regulations issued by the department.
Section 16 extends the sunset of the tax credit under
AS 43.20.043 to 2016 from 2013.
Section 17 adds an effective date of July 1, 2010 for
section 12.
Section 18 adds an immediate effective date for all
sections other than section 17.
Mr. Powlowski stated that Section 12 would ensure that the
small producers could access the benefit of the credits as
they were designed. Section 13 was transition language for
the changes made in Section 8. The same followed for
Sections 14 and 15. Section 16 was the sunset for the
corporate income tax. Section 17 was an effective date for
Section 12 of the bill, which was the repealer section, and
needed to be different than Section 18, because the
repealers needed to be related to the fiscal year.
10:13:13 PM
Co-Chair Hawker informed the committee that a significant
amount of the sectional analysis had been debated in
committee under HB 229; except Section 8, which was a new
section from the governor. Sections 9 and 10 were new and
had not yet been vetted by the committee.
SENATOR THOMAS WAGONER stated that the bill outlined the
exploration and drilling incentive in the amount of 100,
90, and 80 percent, for three wells that would be drilled
off shore in Cook Inlet. The first well would be 100
percent of exploration expenditures, up to $25 million. The
second well would be 90 percent of exploration expenditures
up to $22.5 million. The third well would be 80 percent,
not to exceed $20 million. He understood that in the
industry, producers would share the cost of mobilization
and demobilization of the jack-up rig used by several
parties. It was required in the legislation that the wells
be dug by three, unaffiliated companies, in an effort to
spread the wells throughout the inlet. The Kitchens Unit
was 85 thousand square acres. Another unit was the old ARCO
Sunfish, which sits beneath the area ConocoPhillips was
currently producing gas out of. A clause was included in
the legislation stating; if producers make hydrocarbons
commercially, 50 percent of the allowed exploration cost
would be paid back to the state.
10:17:36 PM
Co-Chair Hawker asked what was unique about the jack up rig
that made the use of it good public policy. Senator Wagoner
replied that the jack up rig was mobile. Stationary
platforms had limited drilling depth because the rigging on
them was not reinforced to allow for deeper drilling. He
explained that drillers were required to drill down to the
Cretaceous area and ideally into the Jurassic area. He
noted the success of the gas and oil production that had
occurred in the inlet but stressed that Cook Inlet had been
underexplored.
Co-Chair Hawker shared that the Alaska Oil and Gas
Conservation Commission was eager to know what was at the
depths of the inlet. Senator Wagoner stated that geologists
maintained that there was an abundant source of oil in the
depths of the inlet. He added that XTO, a subsidiary of
ExxonMobil, had been looking at drilling into the Jurassic
area of the inlet, but had not had support from its
corporate office. The proposed tax credits would be
incentive for the corporate office of XTO to lend its
support to the endeavor.
10:21:13 PM
Representative Gara asked if the bill limited the number of
jack up rigs in the inlet. Senator Wagoner responded that
the state would incentivize the first three wells built by
unaffiliated people. He believed that more than one jack up
rig would be unlikely. Two years ago, Escopeta Oil received
a waiver of the Jones Act for the transportation of the
jack up rig in and out of the inlet. The waiver was still
current.
Representative Gara queried the potential cost to the state
and remained unclear about the total number of wells that
would be incentivized. Senator Wagoner repeated that only
three wells would be incentivized.
Senator McGuire interjected that the cap was $67,500,000
and included just the three wells.
Co-Chair Hawker pointed out to the committee that gross
exposure to the state was the $67,500,000, but provisions
written into the bill would ensure the recovery of 50
percent of the expense.
10:25:16 PM
Co-Chair Hawker stated that sharing the exploration risk
should be the role of the state. Subsequently, if the
efforts were successful, the state should share in the
rewards, in addition to the ordinary royalty and tax
structure. He commended the philosophy behind the
legislation.
Representative Joule asked about the depths needed to reach
the Jurassic area. Senator Wagoner replied 20,000 feet and
below. He furthered that in areas of the inlet the basin
was shaped like a letter "U", which would allow for side
drilling and faster access to the Jurassic area.
10:27:31 PM
Co-Chair Hawker opened public testimony.
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, testified
that the provisions in the bill that stem from the
administration's tax credit bill were identified in the
sectional analysis. One was the elimination of the current
requirement of the demonstration of further investment in
the state by the taxpayer in order to receive a state
purchase of a credit certificate. The change was beneficial
to new exploration ventures that were seeking partners,
primarily investors. The second provision would waive the
interest that would be calculated against an underpayment
of taxes due solely to a retroactive application of a
regulation.
10:31:48 PM
Commissioner Galvin stated that the department recognized
the value of providing the tax credits. The application of
the production tax system was varied because there were
different tax systems for the separate areas of Cook Inlet,
"Middle Earth" (the area between Cook Inlet and the North
Slope), and the North Slope. The provision took the
existing credit program in the income tax section that was
exclusive to gas exploration activity, and expanded it from
10 percent to 25 percent. The application was expended to
the existing units that had production, but were ripe for
exploration. Erecting a jack up rig in Cook Inlet had been
a goal of the state for over a decade. The upfront cost of
the project had been the barrier, and the state had been in
search of a funding source for the mobilization and
demobilization costs. There is no single intently with
sufficient interest in exploration opportunities in Cook
Inlet to economically justify the investment. The bill
highlights the credits up front for perspective players,
which could pave the way for a jack up rig in the inlet.
The state expects multiple years of wells to be drilled
from the rig once it was established in the inlet. The
$67,500,000 was the maximum amount to be paid if each well
costs $25 million. Each well is not expected to cost $25
million, which would limit the states exposure. Most of the
taxpayers would be able to write between 45 and 65 percent
off of the state tax system.
Co-Chair Hawker needed clarification on the jack-up credit.
He asked if the department was comfortable placing sidebars
around the expenditures that would qualify for the credit.
Commissioner Galvin replied yes. He added that the credit
was built around the law and used the existing definition
of eligible costs. The department was comfortable that it
had defined eligible expenditures and the limits of the
stampede credit.
10:38:05 PM
Representative Fairclough wondered if royalties in-kind
from the rigs could be stored for security in the event of
a state emergency. She hoped that the issue could be
discussed into the future.
10:39:27 PM
Representative Gara asked if the jack up rig credit was
exclusive of other credits. Commissioner Galvin replied
yes. Representative Gara asked if the language of the bill
specified that the income tax credit was also exclusive.
Commissioner Galvin responded in the affirmative.
Representative Gara commented that the state currently
charged a very minimal tax, just 2 percent on the gross. He
expressed skepticism that it was the tax rate that was
hindering production in Cook Inlet. He asserted that the
gas in the inlet was difficult to find and that companied
would not explore until there was a utility ready to buy
new gas. How wondered how the tax rate change was a
motivating factor. Commissioner Galvin agreed that lack of
drilling in the inlet was not exclusive to the economic
return for the driller. He said that within the inlet, the
system was inefficient, because the market was capped and
limited and the available reserves had been exhausted. The
amount of investment necessary to justify the next well was
significant. The credits provided would bring down the
initial costs in order to justify the investment for the
monetary return provided by the market. He said that the
production of Cook Inlet gas was not exclusively a revenue
source for state government, but an issue of providing
energy to the people of the area.
10:47:09 PM
ANDREE MCLEOD stated that on July 10, 2009, the state
awarded new oil and gas explorers $193 million. She queried
where the tax credits were. She stated that she had
requested the names of the 15 new oil and gas explorers
that had received the $193 million, and was told the
information was not available to the public. She asked the
public would be made privy as to where the money from the
credits was going.
Commissioner Galvin replied that the request of the names
of the companies that received credits, and the amount of
the credits awarded, was denied because the taxpayer
information was confidential. Her recent modified request
for only the names would be considered after the Department
of Law had examined the extent of the confidentiality
provisions under the tax law.
Co-Chair Hawker stressed that individual taxpayer data was
confidential.
Co-Chair Hawker Closed public testimony.
Representative Gara referred to the expansion of the
corporate income tax tax credit to 25 percent. A benefit
of the credit was that the well data was kept confidential.
He assumed that the Department of Natural Resources (DNR)
had resistance to providing state money and receiving no
data. The data would be necessary in order to expand Cook
Inlet production. Commissioner Galvin replied that DNR was
not his department.
10:53:12 PM
Co-Chair Stoltze MOVED to ADOPT Amendment 1, 26-LS1629\S.1.
Bullock, 4/16/10, by request:
Page 7, lines 8-9:
Delete "at least 3,000 feet below the base of the
tertiary-aged strata"
Co-Chair Hawker OBJECTED for the purpose of discussion.
Mr. Polowski explained that the "3,000 feet" specificity
had been deemed unnecessary.
Co-Chair Hawker WITHDREW his OBJECTION. There being no
further OBJECTION, it was so ordered.
Co-Chair Hawker MOVED Amendment 2 by request:
To Pages 8, line 24:
Delete "2024 and insert "2020
Co-Chair Stoltze OBJECTED for the purpose of discussion.
Mr. Polowski explained the sunset for the corporate income
tax credit in the original bill was 2020. The amendment
would make the commensurate 4 year difference on Page 8,
Line 24 to the sunset change on Page 9, Line 15.
10:55:46 PM
Representative Gara wondered if the corporate income tax
credit had a sunset date. Representative McGuire replied
the sunset date was 2017, with a carry forward meant to
sunset in 2024. Representative Gara asked if the 25 percent
credit would revert back to 10 percent in 2017, except for
the carry forward. Mr. Polowski believed that the credit
disappeared entirely upon the sunset date.
Vice-Chair Thomas withdrew his OBJECTION. There being no
further OBJECTION, Amendment 2 was ADOPTED.
10:57:16 PM
Representative Gara WITHDREW Amendment 4:
Page 4, line 6 following "chapter":
Insert";
(4) shall agree, in writing, to the
applicable provisions of AS 43.55.025(f)(2) and shall
submit to the Department of Natural Resources all data that
would be required to be submitted under AS 43.55.025(f)(2)
for a credit under AS 43.55.025"
Co-Chair Hawker addressed the fiscal notes. Both reflected
zero fiscal impact. Revenue projections were indeterminate.
He wondered if an indeterminate expense fiscal note
existed. Commissioner Galvin said that there were no
expenditures to be noted on a fiscal note. Co-Chair Hawker
thought that an indeterminate fiscal note would be needed
because the bill offered a credit that would need to be
accepted by another party. Commissioner Galvin stated that
the determination of potential credits was a revenue issue.
The department had not projected the expenditures of the
program into the future, and had decided to deem the
expenditures indeterminate for the time being.
Co-Chair Hawker said that the legislature was under no
obligation to add money to 2011 budget as a result of
passing the legislation.
Co-Chair Stoltze MOVED to REPORT SB 309 (FIN), 26-LS1629\S,
as amended, from committee with attached fiscal note and
individual recommendations.
Representative Gara OBJECTED for the purpose of discussion.
He pointed out to the committee the provision on Page 4,
which originally was a new well credit designed for new
production in new wells. Not only was the credit being
expanded to 25 percent, but it was being expanded to be
used in fields and existing wells. He expressed concern
with the change in policy.
Representative Gara WITHDREW his OBJECTION.
There being no further OBJECTION, HCS CSSB 309(FIN), as
amended, was MOVED out of Committee with individual
recommendations and the accompanying fiscal notes.
HCS CSSB 309(FIN) was REPORTED out of Committee with "no
recommendation" and attached new indeterminate note by the
Department of Revenue and previously published fiscal note:
FN2 (DNR).
11:02:30 PM RECESSED
12:44:12 AM RECONVENED
Co-Chair Stoltze noted that the amendment
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